I thought we were past that

In a recent interview with the FT, Peter Navarro, an advisor to Donald Trump claimed the undervalued Euro to be an implicit Deutsche Mark and would benefit only Germany at the expense of our fellow Europeans and, of course, the US.

Hoo boy.

OK, I know that facts are not a particular strength of the new US government, but still, at least the assessment of the situation is correct: The Euro is probably undervalued vis-a-vis the Dollar, if you believe in The Economist’s Big-Mac-Index and thus in purchasing power parity. Given the more robust labour market and the recent monetary tightening of the Fed as compared to the Eurozone’s mess and still ultra-loose monetary policy by the ECB, the claim that the Euro is undervalued isn’t really a stretch.

Also true, undervalued currencies usually, ceteris paribus, benefit exporters of which Germany has a lot. But most of our exports go to Europe, i.e. the claim that Germany would benefit unfairly from the undervalued Euro is not as strong as you may think. In 2015 (oh facts again!), only 9.5% of our exports go to the US (https://www.destatis.de/DE/ZahlenFakten/GesamtwirtschaftUmwelt/Aussenhandel/Tabellen/RangfolgeHandelspartner.pdf?__blob=publicationFile) How exactly our exports to other Eurozone-countries are subject to the (external!) exchange rate is beyond me.

But for the sake of the argument, let’s assume for a second that Germany is benefitting unfairly. The obvious remedy for this would be an appreciation of the Euro vis-a-vis the Dollar, and to do this the ECB should stop its ultra-loose monetary policy and start raising interest rates better sooner than later. Wait, what? Yes, this is basically what Jens Weidmann and Wolfgang Schäuble demand for quite some time now. The allegations that Germany would keep the exchange rate towards the Dollar artificially low is nonsense, at best. And even if, there are some compelling arguments of why the ECB has adopted an ultra-loose monetary policy: weak labour markets in the south, under-capitalised banks, over-indebted governments, etc. Better export opportunities for Germany are merely a side-effect. We can talk about whether the ECB’s policy is adequate or what exactly drives Germany’s exports (non-substitutability perhaps?) or whether purchasing power parity holds, but going back to mercantilist thinking of the past fits the US goverment’s economic thinking: they are not thinking at all.

Repaying Germany’s debt is a good plan, but there is a better one

Politics discuss what to do with Germany’s federal budget surplus of a bit over €6bn. Wolfgang Schäuble, the finance minister, wants to repay some of Germany’s outstanding debt, which is generally a good idea. First, Germany violates a Maastricht criterion by having debt of more than 60 per cent of its GDP and as we have seen in the European debt crisis, high public debt can at times be very dangerous.

Now, usually me as a “fiscal hawk” would agree with Mr Schäuble. But given Germany’s robust growth (1.9 per cent in the last quarter), the general improvement of the federal budget and the fact that we fall behind schedule in investment (see slide 5 of the above presentation by the finance ministry), I would rather suggest to keep the €6bn in the coffers and try to focus more investment (e.g. broadband, infrastructure and education) to bring the money where it is actually needed.

Enforcing Rules Is Important

A while ago on a German train station, I saw a conductor telling a group of people that smoking is prohibited in this station. He was laughed at and ignored. Later on a passenger next to me on the train told the conductor, how glad he was that he stood up to the smoking people and reminded them of the rules. The conductor replied that it is sadly not in his power to enforce the smoking ban in German stations – and not his job for that matter. This would be the job of DB Security, a subsidiary of Deutsche Bahn, who (together with the German Federal Police) is responsible for the security of German train stations and have the means to enforce the rules. The passenger complained that all the security personnel  making their rounds do rarely remind  people of the smoking ban and even more rarely enforce it. An observation I can confirm. The conductor shrugged “A lot is changing” to which the passenger replied “Unfortunately”.

We could now dismiss this little story as an unimportant chat of people unhappy about change, but I think there is more to it. It is not a story about change but about rules and how unenforced rules makes people unhappy.

Continue reading Enforcing Rules Is Important

Germany’s and France’ potential GDP since EMU

I am currently working on an estimation of a monetary union model I set up for my PhD thesis. For this, I need quarterly data of the output gap of Germany and France, which is surprisingly hard to come by. So I estimated it myself using real GDP data from Eurostat (unadjusted, chain-linked). For a very first glance, I de-seasonalised the data via moving-averages. After that, I employed the modified Hodrick-Prescott filter (mHP) as suggested by Bruchez (2003). Yes I know, the HP and mHP filters have their drawbacks and weaknesses, but they are nevertheless useful for a first look on the data.

Continue reading Germany’s and France’ potential GDP since EMU

Schengen has some inconvenient consequences

While Europe’s ongoing economic crisis has revealed fundamental construction errors of the economic and monetary union, the migrant crisis reveals similar faults with Europe’s borders-be-gone Schengen scheme. If the Schengen accords are to survive – and by all means they should – we have to come to terms with the consequences of near-abolishing all internal borders, even if they are hard to accept for politicians and voters. Until now, these consequences were either unknown or ignored, a laziness we can no longer afford. Schengen is an integral, visible and practical part of the peaceful European unification and has to be preserved for practical, political and economic reasons. The pursuit of ever-closer union entails costs, some of them political, such are Schengen’s costs. But as the personal and economic benefits of the accords greatly outweigh the costs, European politics and voters must accept a certain sovereignty loss. Although Schengen is over twenty years old, its completion was not pressing until last year’s onset of the migrant crisis – or it was not seen as pressing. However, it is pressing now. Continue reading Schengen has some inconvenient consequences

A central bank cannot monetise away a liquidity trap

As was expected, today the ECB cut its penalty interest rates on banks’ deposits further into negative territory to 0.4 from 0.3 per cent. Additionally, the ECB also cut its main refinancing operations rate to zero from 0.05 per cent and increased the volume of its QE purchases to 80 billion Euro per month, from 60 billion. As always, the ECB cited sub-par inflation due to slow credit growth as the reason for this policy move.
To my mind, this policy move is merely cosmetic, to keep up the mirage of the ECB’s prowess, where there is actually nothing Frankfurt’s Ostend can do to end Europe’s slump. For years now, Europe is stuck in a liquidity trap. And as we all know, in a situation where the transmission mechanism is broken, more liquidity will not help, that’s why it is called a trap. It seems worth to repeat, that no central bank, no matter how powerful, can monetise away a liquidity trap. Not even the ECB, not even with the fancy, shiny new policy tools of negative rates or QE. Europe’s problem is not liquidity supply, given QE and ultra-low interest, ultra-long provisions, money is everything but scarce. But two features of Europe’s economies make all this supply virtually void.

Continue reading A central bank cannot monetise away a liquidity trap

Fiscal transfers without controls are a bad idea

Yesterday, France’s economy minister, Emmanuel Macron, suggested the Euro Area should have a permanent fiscal transfer mechanism that diverts funds from rich members to poor members. A fiscal transfer scheme between (semi-)sovereign nations without any controls is a really bad idea even for the members of a monetary union. Continue reading Fiscal transfers without controls are a bad idea

Europe needs enforcable rules, no fiscal centralisation

The Economist still advocates a form of debt mutualisation in Europe, that is Eurobonds of one sort or another. While I usually agree with the Economist on most topics, I am really baffled by how stubborn the Economist is in advocating these ideas, rubbish as they are. Continue reading Europe needs enforcable rules, no fiscal centralisation